4 ms·

PFOF is not a problem, except that it hurts your pension funds. PFOF needs to be price improvement. Research has been done and it _does_ give price improvement.

by rocqua 4y ago

PFOF is not a problem, except that it hurts your pension funds. PFOF needs to be price improvement. Research has been done and it _does_ give price improvement. The main point of PFOF is that high frequency traders have much less risk when trading with single persons than they do trading with big players. They are willing to offer them much better prices than they will offer big players. Suppose there is 10cents difference. PFOF means they pay your broker, say 5c to give you a 5c better price. You are better off, your broker is better off, the high frequency traders are better off. The only people worse off are the big players. Because when HFTs can filter out the low risk trades, the high risk trades get more expensive for them. Research has been done showing that different brokers split the price advantage differently. Robin hood, IIRC was one the worse side, allocating 80% of price advantage to PFOF, leaving only 20% to the customer. But the customer is still better off than paying the public exchange rate. ----------------------------- The above was written before I found this report: https://www.afm.nl/~/profmedia/files/nieuws/2022/afm-paper-assessment-execution-quality-pfof-venues.pdf https://www.afm.nl/~/profmedia/files/nieuws/2022/afm-paper-a... I found it trying to find the source for the research I quote. That stat came from Matt Levine's newsletter. This report contradicts what I wrote above. It does seem that the report is about european brokers, whilst Matt Levine was talking about US brokers. edit: I believe this is the orginal source regarding US markets: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4189239 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4189239

cool_dude85 4y ago
>Research has been done showing that different brokers split the price advantage differently. Robin hood, IIRC was one the worse side, allocating 80% of price advantage to PFOF, leaving only 20% to the customer. But the customer is still better off than paying the public exchange rate. But why should Robinhood or whoever else get part of the 10 cents that the algo is offering me, the little ol' retail investor? Just because they're in position to gobble some of it up without me knowing?
- thefreeman 4y ago
  Because they built the app you are trading on, made the agreements with the HFT, and are facilitating the trade?
- brookst 4y ago
  Because they’re offering you “free” trades and making their money from their cut of that price advantage rather than charging you $5? I don’t use Robinhood, but I don’t see anything wrong with that pricing model. Prohibiting it would be equivalent to banning no-fee trades for small time retail investors. It would be like banning ad-supported business models. Well, on second thought…
- affyboi 4y ago
  I mean because you’re using their platform and these are the terms - people have always been free to use other brokers, like the ones that charged commission. Regulations also mean that you have to get NBBO or better so your fill price is never worse than the market
thedangler 4y ago
When its used in dark pools and used the internalize orders. I mean, how can a stock have repeat 90% buy to sell ratio for over 2 years and still go down? Makes no sense.
- this_user 4y ago
  There is no such thing as a "90% buy to sell ratio", because every transaction consists of a buy and an equal-sized sell. You can try to classify each marketable transaction in terms of whether buyers or sellers were more aggressive, but that doesn't tell you anything about the state of the order book and the amount of resting orders that are present. Large portfolio do not unwind their positions by just throwing everything into the market as marketable orders, they put chunk after chunk of it into the order book as resting orders. That can easily drive down the price even if it looks like buyers are more aggressive in terms of marketable orders.

by rocqua 4y ago

cool_dude85 4y ago

>Research has been done showing that different brokers split the price advantage differently. Robin hood, IIRC was one the worse side, allocating 80% of price advantage to PFOF, leaving only 20% to the customer. But the customer is still better off than paying the public exchange rate. But why should Robinhood or whoever else get part of the 10 cents that the algo is offering me, the little ol' retail investor? Just because they're in position to gobble some of it up without me knowing?

thefreeman 4y ago
Because they built the app you are trading on, made the agreements with the HFT, and are facilitating the trade?
brookst 4y ago
Because they’re offering you “free” trades and making their money from their cut of that price advantage rather than charging you $5? I don’t use Robinhood, but I don’t see anything wrong with that pricing model. Prohibiting it would be equivalent to banning no-fee trades for small time retail investors. It would be like banning ad-supported business models. Well, on second thought…
affyboi 4y ago
I mean because you’re using their platform and these are the terms - people have always been free to use other brokers, like the ones that charged commission. Regulations also mean that you have to get NBBO or better so your fill price is never worse than the market

thedangler 4y ago

When its used in dark pools and used the internalize orders. I mean, how can a stock have repeat 90% buy to sell ratio for over 2 years and still go down? Makes no sense.

this_user 4y ago
There is no such thing as a "90% buy to sell ratio", because every transaction consists of a buy and an equal-sized sell. You can try to classify each marketable transaction in terms of whether buyers or sellers were more aggressive, but that doesn't tell you anything about the state of the order book and the amount of resting orders that are present. Large portfolio do not unwind their positions by just throwing everything into the market as marketable orders, they put chunk after chunk of it into the order book as resting orders. That can easily drive down the price even if it looks like buyers are more aggressive in terms of marketable orders.